The central bankers' central bank: a new banking crisis?

But should the BIS be listened to at all?

The Bank for International Settlements – the Swiss-based multinational institution which is known as "the central bankers' central bank" – has issued its 83rd annual report, which warns of the potentially massive implications of a spike in bond yields.

BIS argues that an increase in average yields of 300 basis points – 3 percentage points – would lead to losses on US Treasury bills of over $1trn, and it warns that such a big move can happen "relatively fast":

Someone must ultimately hold the interest rate risk. As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care.

The warning fits into a narrative which began last week: that the US Federal Reserve's decision to "taper" its quantitative easing program will end the period of artificially low bond yields. There has certainly been a spike in yields: a 10-year UK gilt yields 2.48 per cent, compared to 1.90 a month ago, while 10-year US is up to 2.58 per cent from 2.01.

But the BIS has its scope set wider. The rises we've seen this month are merely the difference between "low" and "very low" cost of debt for solvent sovereigns; it doesn't yet change the overall story of the last thirty years, which is continued decline in yields.

Instead, as the Economist's Ryan Avent writes, to understand BIS's advice, we have to remember its background as an institution where the central bankers go to tell each other the myths on which their self-esteem rests. And key amongst those myths is the argument that interest rates – the key driver of monetary policy in most open economies – have been too low in recent years.

If interest rates have been too low, then bond yields are doubly depressed, first by QE and second by the low rates. It's easy to see how that belief spirals into warning of an inevitable spike in yields.

But, Avent points out, rates aren't low (or rather, too low) when they are low in absolute terms. Instead, we have to look at where they are compared to where they should be to encourage full employment. Given the deeply depressed economies in the developed world, it is almost certainly the case that interest rates at the level the Bank of England's 0.5 per cent are too high: that, rather than running the risk of causing the economy to overheat, they are dampening investment and growth.

There's a similar infestation of central-bank-ese in the BIS's treatment of sovereign debt, which Avent summarises as "Something something fiscal policy":

Central bankers have strong views on what governments ought to be doing with their budgets, many of which make most sense when given the least scrutiny. The BIS knows what it wants to say: that fiscal consolidation is almost universally necessary and the only real question is how to pursue it. Picking a path toward this argument that doesn't immediately cave in under the weight of self-contradiction proves to be a difficult task.

Paul Krugman is even harsher, writing that:

Part of what makes the report so awesome is the way that it trots out every discredited argument for austerity, with not a hint of acknowledgement that these arguments have been researched and refuted at length.

The BIS pulls the classic two-step of looking at problems from within the Eurozone – where sovereigns without central banks have seen massive explosions in debt and borrowing costs – and extrapolating that to non-Eurozone nations. In short, it's not moved on from the economic "debate" which occurred in the spring of 2010, over whether Britain was the next Greece. (In case you've missed this one: it's not.) But even within the Eurozone, the BIS analysis is problematic, demanding massive deleveraging in countries which are already struggling to cut what spending they can. It fails to acknowledge the first rule of Eurozone budgets: if you are trying to cut debt/GDP ratios, it's more important in the current economic climate to keep growth up than it is to cut government spending.

BIS goes one step still, though. It calls for mass private sector deleveraging at the same time, inveighing against general balance sheet overhang. Quite apart from the fact that it's tricky for all sectors of the economy to deleverage at the same time – someone has to buy the debt – there's that whole paradox of thrift thing which we've known about for a little over three hundred years.

"If the world is lucky," writes Avent, "central bankers will discount the recommendations of the BIS." If the world was lucky, there'd have been better recommendations in the first place.

A woman cycles past the Bank for International Settlements in Basel, Switzerland.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The idea that sitting all day behind a desk increases your output is a fantasy

If you don’t trust people, at least make sure that you imprison them, seems to be the idea.

Scruffy and tieless, I was the odd one out. Taking a break from research in the London Library, I settled at the bar of an Italian restaurant and resumed reading Tony Collins’s excellent book Sport in Capitalist Society. While the hedge-fund managers looked askance, the young Hungarian waiter recognised one of his own. “That was the subject of my PhD,” he explained, before giving me a sparkling history of sport and Hungarian society.

He now juggles waiting tables with writing articles. It’s not easy. He tells me that when he rereads his old academic work, “Sometimes I need a dictionary!” Like many other people in today’s economy, he balances different jobs, the remuneration and fulfilment varying significantly.

As you have probably noticed, it seems that almost everyone is employed but hardly anyone has a job. Of the 42 million people of working age in Britain, 23 million are in a full-time job; roughly 14 million are full-time parents or carers; most of the rest work part-time, or are self-employed, or work for a business that is so small that it is, in effect, a form of self-employment. The “job” – the salary, the subsidised canteen, the pension – is on the wrong side of history. That is both liberating and scary.

There are two separate points here. The first, deriving from the privilege of choice, is that some people (I am one of them) are happier with the variety and freedom of self-employment. The second is that many people do not have a choice: solid, dependable jobs are a dead concept. We had better get used to fending for ourselves, because we are going to have to.

The phrase “portfolio career” was popularised by the management thinker Charles Handy. “I told my children that they would be well advised to look for customers, not bosses,” as Handy put it. “The important difference is that the price tag now goes on people’s produce, not their time.”

This transition from time-serving to genuine contribution can be good news for workers and employers alike. The art of being an employee is to string things out while pretending to be busy. The art of being self-employed is the opposite: getting things done well and efficiently, while being open to taking on new work. Employees gain an incentive to look effortful, the self-employed to look effortless.

The idea that sitting constantly behind a desk increases output, which underpins the old concept of a job, is a fantasy derived from control: if you don’t trust people, at least make sure that you imprison them. As an unfortunate consequence, the projection of phoney “busyness” consumes more energy than actual work and brings a kind of compound stress: always bustling around, never moving forward. “Never walk past the editor’s office without carrying a piece of paper,” young journalists are advised.

When I turned pro as a cricketer, an old hand told me that if I ever felt lost at practice, I should untie my shoelaces and then do them up again. “We don’t measure success by results but by activity,” as Sir Humphrey quips in Yes Minister. Ironically, I had never realised that my career as a sportsman – apparently playful and unserious – would prove to be the outlier for opposite reasons. Where most careers have drifted towards freelance portfolios, professional sport has tightened the leash. When you have to eat, sleep and train according to strict rules, your job is at one extreme end of the control-of-freedom spectrum. Yet even in elite sport there is more room for semi-professionalism than the system usually allows, especially in games – such as cricket – where physical fitness is necessary but not sufficient.

Yet the reality of the portfolio career inevitably brings new problems that are bound up with wider forces. A life that is spent moving from one institution to another – from school, to university, to a lifelong job – is becoming exotic, rather than the norm. For most of us, there will be no retirement party, no carriage clock. It is not just finding income that is being devolved downwards; so, too, is the search for meaning, purpose and identity. We live in what Handy calls a “de-institutionalised society”.

There are civilising aspects to the trend. First, the new employment landscape reduces the likelihood of people wasting their lives in the wrong job just because it is safe. Handy cites data suggesting that 80 per cent of employees feel dissatisfied in corporate jobs while 80 per cent are happy leading freelance lives. Nor does the old lie – that of backloading happiness, with corporate sacrifice giving way to happy retirement – stack up. We are better off balancing duties and pleasures all the way through.

Second, the decline of the job-for-life may gradually undermine the assumption that everyone’s wealth and prospects (let alone their value) can be determined by a couple of questions about an employer’s address. Social assumptions based on (apparent) occupation are increasingly ridiculous. Guess who the scholar is in the Italian restaurant: the waiter. It’s a good lesson. Your Uber driver could be a landscape architect, funding his professional passion with part-time top-ups.

The language of employment (“Where do you work?”) has been slow to catch up with this reality. When asked, “What do you do?” a freelancer can give a full and interesting answer, only to prompt the follow-up question, “So, what do you do, then?” If conversation becomes less like a mortgage questionnaire, that can only be a good thing.

Hugo Rifkind, writing recently in the Times, admired the Scandinavian-inspired decoupling of taste from wealth. “It is a ­better world . . . where you are not judged on the lineage of your sideboard.” I am more radical. It is a better world when you are not judged on your job.

Better or not – and like it or not – we will have to get used to it. 

Ed Smith is a journalist and author, most recently of Luck. He is a former professional cricketer and played for both Middlesex and England.

This article first appeared in the 05 February 2015 issue of the New Statesman, Putin's war